Ideas and Opinions|17 April 2007

From Yale University School of Medicine and Veterans Affairs Connecticut Healthcare System, New Haven, Connecticut, and University of Michigan School of Public Health, Center for Practice Management and Outcomes Research, and Ann Arbor Veterans Affairs Medical Center, Ann Arbor, Michigan.

Allison B. Rosen, MD, MPH, ScD

From Yale University School of Medicine and Veterans Affairs Connecticut Healthcare System, New Haven, Connecticut, and University of Michigan School of Public Health, Center for Practice Management and Outcomes Research, and Ann Arbor Veterans Affairs Medical Center, Ann Arbor, Michigan.

From Yale University School of Medicine and Veterans Affairs Connecticut Healthcare System, New Haven, Connecticut, and University of Michigan School of Public Health, Center for Practice Management and Outcomes Research, and Ann Arbor Veterans Affairs Medical Center, Ann Arbor, Michigan.

Grant Support: By grant K23 AA14483-01 from the National Institute of Alcohol Abuse and Alcoholism.

Abstract

As the financial burden of cost sharing continues to rise, patients increasingly avoid necessary care, thereby contributing to the high morbidity and mortality of the U.S. population compared with that of other developed countries. The rationale for cost sharing is often based on the moral hazard argument, which states that individuals may overuse care if they do not share in its costs. We evaluate this argument in detail, using it to distinguish between appropriate and inappropriate settings for cost sharing. Cost sharing may be appropriate when health services are of low value (low ratio of benefits to costs), whereas it is inappropriate when health services are of high value (high ratio of benefits to costs). In practice, cost sharing is rarely linked to value, and therefore much of the cost sharing that currently occurs is inappropriate and harmful. Cost-effectiveness analysis is an objective method to estimate the value of health services and may be a way to systematically evaluate whether cost-sharing policies are appropriate. Systematic efforts to discourage inappropriate cost sharing may improve public health.

Cost sharing is highly prevalent in the U.S. health care system, in which most insured workers pay deductibles and almost all pay copayments (1). In the past 5 years, deductibles have increased between 73% and 140% and copayments have increased between 43% and 105%, and fewer than half of insured persons are “very confident” that they have enough money to pay for the usual medical costs that a family requires (2). The federal endorsement of high-deductible health plans, together with their 4-fold increase in prevalence, suggests that cost sharing will only continue to increase in the coming years.

Because of the ubiquity of cost sharing, viewing it as an immutable fact of our health care system may be tempting. However, complacency with cost sharing in its present form is preventing vulnerable groups from receiving essential care (3–10), thereby decreasing the efficiency of resource allocation. This inefficiency is probably contributing to the low ranking of the United States in public health indices worldwide (25th in life expectancy and 24th in years of life spent in good health), despite its great wealth and unmatched health care expenditures.

The Moral Hazard Argument

The economic justification for cost sharing stems from the moral hazard argument, which posits that individuals with health insurance will overuse health services because they bear no portion of the financial burden (11). In economic terms, overuse implies that the benefits are less than the risks and costs and, therefore, the expenditure would provide greater benefit if it were spent in another way. For example, if someone with a high pretest probability of tension headache were offered the choice of magnetic resonance imaging (MRI) to rule out a structural lesion or an equivalent cash award, she would likely derive far more utility from the cash award. However, because her incentives are distorted by health insurance, she receives the MRI, and resources are expended in a manner that confers less utility than would other possible resources (such as the cash award). When this situation is generalized, resources are used inefficiently and social welfare suffers. Cost sharing can eradicate this moral hazard, and it has been widely advocated by health economists for this reason. If the person with a headache had to pay a substantial copayment for MRI, she would have forgone the test, leaving the money to be allocated in other ways that may confer more benefit.

However, the moral hazard argument does not apply to situations in which a medical expenditure would confer greater benefit than alternative uses (12, 13). If the woman with a headache had a high pretest probability of an aneurysm rather than a tension headache, the MRI would probably confer more benefit than an equivalent cash award because it could avert a potentially fatal condition. Yet a substantial copayment may deter her from choosing it because she may not understand the life-threatening nature of a possible aneurysm or she may be focused on a more immediate and tangible concern (for example, a late car payment). Therefore, her overall welfare would decrease and the moral hazard argument would not hold.

If individuals were always perfectly informed about the costs and benefits of medical care, always aware of long-term as well as short-term consequences of care, and always had sufficient resources to pay for care, the moral hazard argument would hold and cost sharing would indeed be beneficial. However, it is likely that the moral argument is frequently specious, as data suggest that cost sharing is often harmful in practice.

Empirical Data on the Impact of Cost Sharing

Studies from heterogeneous patient populations and settings show that cost sharing is an exceedingly blunt tool that reduces health service utilization substantially, even when those services are of great necessity or benefit.

Experimental Studies

In the RAND Health Insurance Experiment (14), approximately 2000 families (5473 persons) were randomly assigned to varying levels of cost sharing for medical services. Subsequent health service utilization and outcomes were tracked. Investigators found that persons in the higher cost-sharing groups decreased their use of low-efficacy services (such as antibiotics for probable viral infections) and high-efficacy services (such as antihypertensives) alike.

Observational Studies

More recent observational studies offer further evidence that cost sharing decreases service use indiscriminately, regardless of effectiveness or value. Ellis and colleagues (3) found that users of 3-hydroxy-3-methylglutaryl coenzyme A reductase inhibitors (statins) who had copayments greater than $20 were 3 times more likely to refill prescriptions late and 4 times more likely to discontinue treatment altogether than were users who had copayments less than $10. Furthermore, this relationship persisted regardless of whether statins were prescribed for secondary prevention (very high value) or primary prevention (lower value) of cardiovascular disease. Huskamp and coworkers (4) found 24% lower use of statins and angiotensin-converting enzyme inhibitors as copayments increased, and Goldman and associates (5) found that use of antihyperlipidemic and glycemic agents decreased by 35% and 25%, respectively, when copayments doubled. These 2 latter studies provide additional evidence that cost sharing reduces utilization of high-value services.

A growing body of literature suggests that copayments may adversely affect health outcomes as well as utilization. Heisler and colleagues (6) found that among individuals who self-reported cardiovascular disease, those who restricted use of medications because of cost reported higher rates of angina, nonfatal heart attacks, and strokes. Tamblyn and associates (7) found that an increase in cost sharing among elderly and indigent patients in Québec, Montréal, Canada, was associated with increased rates of hospitalization, long-term care admission, or death. In an empirical study of targeted copayment reductions, Schoen and coworkers (8) found that copayment relief for indigent patients with heart disease decreased cholesterol levels, blood pressure, and hospitalization rates. Finally, modeling studies suggest substantial benefit from targeted reductions in copayment reductions (9, 10), including the potential to avert nearly 80 000 cardiac hospitalizations annually (9).

Insights from Empirical Data

Exposing consumers to the costs of their care seems to reduce utilization regardless of value. Cost-related underuse of valuable services may harm health, certainly reduces quality, and may even increase overall costs, perpetuating the cycle of cost shifting to contain health care cost growth. While cost sharing should be limited to situations in which moral hazard may lead to overuse, this is not the standard in health care today, resulting in underuse of high-value therapies in practice. The Table shows selected high-value services that are commonly provided in primary care settings. With the exception of some preventive interventions, payers apply cost sharing to nearly all these services. Furthermore, high-deductible health plans, the cornerstone of the Bush administration's proposed health reforms, are likely to exacerbate this problem unless payers are required to waive deductibles for high-value services.

Is There a Solution?

Cost sharing should be linked to value (15) rather than applied as a one-size-fits-all tool. High-value services, such as angiotensin-converting enzyme inhibitors for diabetic nephropathy, should not be subject to cost sharing, whereas low-value services, such as brand-name drug substitutions, could be. In addition to increasing social welfare, this principle would align the conflicting incentives faced by providers and patients in the pay-for-performance era. It seems a logical inconsistency that we pay physicians to prescribe β-blockers after myocardial infarction yet financially penalize patients for taking them.

How to Link Cost Sharing to Value

Linking cost sharing to value requires a quantitative method to compare the value of health services. Fortunately, such a method already exists. Cost-effectiveness analysis (CEA) compares the incremental costs of a health service with its incremental health benefits, yielding an intuitively appealing measure of value. High-value CEA assessments could be linked to a waiver of all cost sharing (that is, no copayments or deductibles), low-value or ambiguous CEA assessments could leave cost sharing unchanged, and very-low-value CEA assessments could be linked to increased cost sharing. The perspective of society rather than particular payers would need to be adopted in these CEAs because costs incurred by particular payers may result in important benefits or cost savings elsewhere in society and payers may be reluctant to invest in high-value interventions when benefits are delayed until after patients may have switched health plans.

Although CEAs are increasingly published in the medical literature and are used in other countries to guide coverage decisions (16), their results have gained little traction in the U.S. policy arena, probably because of concerns that CEAs would be used to deny health services (17). This fear was amplified when health authorities in Oregon invoked the principle of value maximization to deny health services to Medicaid recipients, even though they did not perform CEAs (18). We argue that CEAs should be linked to incentive mechanisms rather than to proscriptions. Indeed, it seems logical that the most widely accepted method of assessing health service value (the CEA) should be linked to the most widely accepted method for controlling health service utilization (cost sharing).

Challenges in Linking Cost Sharing to Value

Linking cost sharing to value will probably pose challenges that are substantial but not insurmountable, especially in light of the large potential health gains. First, data are currently insufficient to inform many needed CEAs. Therefore, a systematic effort to link cost sharing to value will require increased funding for cost-effectiveness research. Health services that consume the greatest share of resources should be targeted preferentially.

Second, results of CEAs need to be simplified when translated into practice to avoid policy prescriptions that are too cumbersome. Analogous to how formularies now group pharmaceuticals into copayment tiers, different types of health services could be grouped into 3 or 4 cost- sharing tiers that are stratified on the basis of value, with cost sharing waived for the highest value services. By keeping things simple, value-based cost sharing would be no more of a burden on caregivers or administrators than are current systems; tiers would simply be assigned on the basis of value rather than cost.

Third, employers and payers may worry that waiving cost sharing will increase their expenditures. It is important to emphasize that linking cost sharing to value may not necessarily increase expenditures for payers. Cost sharing could be increased for services that are particularly low in value, allowing value-based cost sharing to be implemented in a revenue-neutral manner.

Fourth, health plan decision makers are often unfamiliar with CEA and other methods of quantifying health benefits. In a survey of medical directors of 228 managed care plans nationwide, 90% considered costs when making coverage decisions, whereas fewer than half formally analyzed the ratio of costs to benefits (19). Therefore, education about CEA methods would need to become more widespread, and regulatory authorities may need to introduce incentives to promote their use.

Finally, CEAs themselves have important limitations. Deciding where to draw the line between “high value” and “low value” remains controversial. Therefore, implementing the results of CEAs will probably involve comparison with a “band” within which interpretations are ambiguous (for example, $50 000 to $100 000 per quality-adjusted life-year) rather than with a single threshold (for example, $50 000 per quality-adjusted life-year). Cost-effectiveness analyses consider only the magnitude of health benefits and not their distributions, and equity considerations may sometimes supersede efficiency. In addition, CEAs remain highly dependent on analysts' underlying assumptions, evidence sources, and methods of sensitivity analysis. Although techniques are being developed to increase the transparency of these assumptions and their consequences (20), basing policy decisions on at least 2 analyses that are conducted independently and are shielded from conflicts of interest will probably remain prudent. However, although CEA methods are imperfect, to “make the perfect the enemy of the good” would be a mistake. Cost-effectiveness analysis is arguably the best way to compare the value of health care services on a level playing field by using an explicit, systematic, and quantitative method, and it is therefore the best candidate to link cost sharing to value.

Cost sharing is not a one-size-fits-all tool. Policymakers and clinicians should demand that cost sharing be used only when it does not decrease the use of high-value services and does not have a deleterious effect on health. Initially, this principle could be applied to the Medicare prescription drug benefit and, if successful, extended to nonpharmaceutical domains of health care as well as nongovernmental payers. Currently, there is no mechanism in place to evaluate the appropriateness of cost-sharing decisions and no effective means of regulating its applications. Complacency with this system is squandering an important opportunity to improve health in the United States.

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4 Comments

I agree with Drs. Braithwaite and Rosen that cost-effectiveness (C/E) analysis is underutilized. However, we need to focus less on C/E analysis as a guide to "policymakers", and more as guides to consumers, the ultimate "payers". With reasonable and balanced information in the hands of patients, high-value services will be consumed based on their own merits without the universal and inherently inefficient subsidy that the authors advocate. The truth is that most health expenditures are private, meaning that the individual patient is the only one who benefits (1). If the informed patient does not want to buy the "essential" or "necessary" high value service or drug using his own money from a health savings account because of personal choice, low risk/benefit or harmful side effects, why should the rest of society pay for it?

Let's analyze the tension headache scenario assuming no distortion by comprehensive health insurance. Assume the patient and physician face the choices of a) doing nothing/waiting, b) buying a $300 noncontrast CT, or c) buying a $1000 MRI exam. From the patient perspective, the test should be ordered if the expected marginal benefit (EMB) is greater than the price. The EMB should depend on the pretest probability as determined and explained by the physician. For instance, if the EMB is $200 to exclude a bleed or tumor, the patient should decline testing. However, with moral hazard, the patient would likely demand not just the CT but also the wasteful MRI exam, which all consumers would pay for in higher premiums.

Again assuming no insurance, if we increase the EMB to $600 (assume the risk of a mass is much higher), the CT purchase becomes a good deal. The authors assume that the typical patient won't make the "right" decision and buy the test. With 1000 patients, probably some won't buy, but most will. If we include moral hazard effects, almost all patients would likely demand the MRI to screen for aneurysms, meaning $400 is wasted each time.

The reality of moral hazard overconsumption does not depend on perfect information or sufficient resources. Moral hazard is based on typical human behavior: "Each individual patient would like to consume any service that has any expected benefit at all if the out of pocket cost is zero." (1). The harmful effect of excess moral hazard in distorting the health insurance market and increasing costs for all is also underappreciated (2).

2. Keen JD. Another way to think about insurance: Government action distorts the market price with harmful side effects. J Am Coll Radiol, June 2007.

Conflict of Interest:

None declared

Edward J. Volpintesta

No Affiliation

April 20, 2007

Moral Hazard Or Legal Hazard?

The authors make convincing statements using the "moral hazard" argument to point out how cost sharing, in some instances, may induce patients to avoid necessary care.

But they overlooked an important point.

Patients don't order their own tests and procedures, doctors do it for them. This gives doctors even more weight than patients in the moral argument, since they are the prime movers of the tests and medications ordered.

Thus,regardless of how beneficial a test or therapy may be; or how scarce the patient's ability to pay, it is clear that more is involved here than just the moral hazard argument advanced by the authors. I think that there is also a "legal hazard" argument involved which must be considered.

What's the "legal hazard"?

In our current litigous climate, it is not unusual for doctors,in an attempt to ward off frivolous malpractice suits , to order, against their better judgment, tests, procedures, and medications whose benefits are of questionable value to their patients. This raises the cost of health insurance premiums for everyone in the form of higher co-pays and higher deductibles.

Physicians know that a jury will sympathize with an injured patient long before it can understand the scientific reasoning behind any cost- benefit profile of a test.

Cost-benefit studies, should ideally, guide doctors and allow them to be better clinicians and allow patients to control the cost of their care. But until physicians can feel free from down stream allegations of negligence in cases where the outcomes are not satisfactory, it is unlikely that they will encourage their patients to accept a cost-benefit approach to their care. This means that those who can afford higher co- pays and don't need expensive technology or medications, will continue to get them and, in doing so will consume and waste insurance funds, artificially inflating the cost of care for everyone, affecting those who cannot pay the most.

Consequently, patients--rich and poor-- will struggle with higher co- pays and higher deductions because their doctors will most likely coninue to make their recommendations based on the logic of the "legal hazard" argument rather than the moral hazard.

Until doctors feel free to order tests and medications that they feel their patients really need and will benefit from, the moral and legal arguments will oppose each other, and I am afraid that as experience has shown, the legal argument will win out.

The real answer is to improve the way medical liability is handled. Taking medical liability out of the courtroom and dealing with it in health courts presided over by judges with special training in medical issues and with neutral court-appointed expert witnesses will relieve doctors' anxieties over frivolous lawsuits, and more importantly restore their integrity and faith in their medical skills and judgment.

When that is done patients who don't need expensive technology and medications will be convinced by their doctors to avoid them. The money saved should be enough to pay for those who truly need expensive care but cannot pay for it.

Conflict of Interest:

None declared

Fred I. Polsky

No Affiliation

April 24, 2007

Pitfalls in Linking Cost Sharing to Value

Drs. Braithwaite and Rosen present an intriguing argument for enhancing patient compliance with "high value" medical therapies, namely removal (or reduction) of cost share obligations by the third party bearing risk (1). The authors correctly identify a major barrier to implementation of their proposal, namely actuarial amortization of the added cost to the payer, when the "payback" (medical offset) from reduction in utilization of services may occur with an uncertain time horizon, if at all. Payers in North America and Europe have attempted a value-based co-payment system within the Prescription Drug Benefit in recent years, known as "Reference Pricing". Here, the lowest co-payment tiers are assigned to drugs with the highest cost effectiveness, incorporating net acquisition price (including rebates and discounts), time to illness remission, relative efficacy, potency, patient compliance factors, and therapeutic index (2). The system, unfortunately, has potential utility limited to the few drug classes where abundant head-to-head studies are available, including reliable comparisons of all the above parameters. Few of the studies satisfy stringent cost effectiveness analytic criteria. To cite a political problem, clinical staff employed by payers and charged with the obligation to recommend those treatments for co-payment reductions may suffer accusations of caprice, conflict of interest, and lack of sensitivity to clinical practice guidelines and sub-specialty- driven, parochial priorities. I would take issue with the authors' choice of words by calling pharmaceutical co-payments penalties (page 603, column 2, paragraph 2). A benefit that obligates the payer for between 65 and 80% of the ingredient cost of the drug (3) should not be thought of as punitive to the member, though the authors cite evidence that moving toward 100% payer obligation enhances beneficiary compliance. A possible starting point for copayment reduction would be to use adjudicated treatment goals, promulgated by external organizations with quality benchmarks (i.e., HEDIS measures), and to bring all payers together within a given marketplace to agree to the same degree of copayment relief. In this way, the most generous payer, who might otherwise act unilaterally, is not subject to the hazard of adverse beneficiary selection, a very real concern for insurers. Furthermore, all payers would be underwriting equally the future windfall of healthier patients who change plans and exhibit utilization reduction only after plan conversion.

Conflict of Interest:

None declared

R. Scott Braithwaite

Yale University

June 6, 2007

Linking cost-sharing to value

We thank Dr. Polsky for highlighting several substantive issues. Reference pricing (that is, paying only the price of the cheapest within a class of similarly effective drugs) is only one among many possible ways of linking cost sharing to value, and only concerns drugs within a particular class. We endorse an approach that is sufficiently flexible to address a broad range of drug and non-drug clinical alternatives.

We recognize that cost-sharing decisions may be plagued by accusations of caprice and conflict of interest, and these same concerns motivated our work. We have proposed a more objective method of making cost-sharing decisions that may ultimately diffuse some of this criticism. The creation of a new national center for comparative clinical effectiveness research may further enhance these efforts.

Evidence limitations are always an important concern in medical decision making. However, it is important to note that endorsing a particular decision-making framework may lead to greater efforts to gather relevant evidence. New approaches may make the use of existing evidence more transparent.(1) Finally, "abundant, head to head studies" may not always be necessary, particularly if additional data would be unlikely to change a decision.(2)

Waiving cost-sharing for HEDIS measures is a sensible idea that is complementary rather than alternative to our approach. However, only a small subset of high value interventions may be encompassed by HEDIS measures. Conversely, some HEDIS measures may lack evidence of cost- effectiveness. We advocate using a more conceptually robust and generalizable method.

We agree with Dr. Polsky that pharmaceutical copayments should, generally, not be considered penalties. However, when there is overwhelming evidence of cost-effectiveness, copayments may act as such. Indeed, in the rare circumstances when therapies are cost-saving (for example, beta-blockers after myocardial infarction), a logical extension of the cost-sharing ethos would be to share that cost-savings with the patient (that is, to provide a small inducement for adherence).

Finally, Dr. Polsky raises two common concerns for payers: can value- sensitive health plans be implemented in practice, and will they save money? These questions have different answers. Pitney Bowes, University of Michigan, Marriott and Mohawk are just a few examples of employers who have successfully adopted value-based copayment programs, so they are definitely feasible. However, it is not appropriate to expect that these programs will always save money. We must remember that the primary return on a health care spending investment is good health.